[WFC Q1 Results]

The most impressive piece is the pre loan loss earnings of $9.2b compared to just $7b in Q4.  If you normalize the credit losses this would imply $3.50+ of run-rate earnings power.  Also, the TCE ratio is up 30 basis points sequentially so they are rebuilding capital very quickly.

I bought the stock at <$9 and the L preferred at <$350 and feeling stupid for beeing too timid on position size...

[Preferred Stocks]

trust preferred = interest income

preferred stock = dividend income

 

from a US corporations perspective...

 

interest income = taxed at corporate rate

dividend income = taxed at corporate rate after a "dividends received deduction" of 70%

so for example, on buffett's GS pfd's he gets 10% less a tax of 10% x (1-70%) x 35% =  1.05% tax / 10% dividend or a 10.5% effective tax rate

[Preferred Stocks]

http://www.bloomberg.com/apps/news?pid=20601213&sid=agPsi3R8BaWM&refer=home

 

I bought some more pfd's on Monday (USB).  Holdings are WFC L, PNC L, BAC E, USB L.  I may now sell the USB L for the USB H which is a floater (i see significant inflation on the horizon) as the yield differnetial is now lower and it trades at 40% of par.  USB is the most absurd to me.  There are few circumstances where USB common equity gets wiped out and the financial system/ economy survives.  They generate strong earnings (equivalent to 5% of the loan balances before taxes and loan loss provisions) of which 1/2 are fee driven and they have adequate capital such that the common is unlikely to be diluted by a stress test.  The preferred is in very strong shape despite being noncumulative.  I bought this at 50% of par and a 16% yield!  Using Obama tax rates of 20% divi and 39% marginal this is the equavalent of a 21% fully taxable yield.

 

[Preferred Stocks]

I agree that the lack of consistency is terrible. The government seems to be doing their best to manufacture a depression.

 

That said... Citi created the arb of a lifetime. You could buy the series AA and F for about 5-6 this am and short out 7.7 shares of citi common for 1.50-1.80. Basically you double your money on the capital put up for the long. By the end of the day the arb returned about 50-60%

 

I think this bodes well for preferred of strong banks as a worst case which isn't so bad. Makes me like my BAC position more

[Preferred Stocks]

I also like the PNC L and BAC E (speculative, but interesting risk-reward as a small piece of a basket)